Credit Cards Can Be Friend or Foe

Almost everyone in America, from teens to retirees, has a credit card. Chances are your mailbox is full of credit card offers right now. But why should you have one? Well, they are convenient to use and can be safer than carrying cash, and they offer you consumer protections under federal law. However, it is also a big responsibility because if not used carefully, you may end up owing more than you can repay and damaging your credit rating.

So, what should you know before you apply for a credit card? The following information will give you a basic understanding of how credit card financing works, and help you determine what to look for when selecting a particular type of credit card, and how to use your card responsibly.

Here Are Some Advantages of Credit Cards:

• They offer protection against theft of your cash because credit cards allow you to carry less of it.
• If you’re traveling, it is usually easier with a credit card. Most hotels and rental car companies will not take a reservation without one.
• They allow for predictable payments of expensive items in installments you can afford.
• Credit cards are a good way of keeping a detailed record of your spending.
• They are great for emergency situations like car repairs, health care, etc.
• Credit cards can help you build up a for your future.
• If you can use your card responsibly, you’ll end up a smarter money manager.

Here Are Some Disadvantages of Credit Cards:

• Credit cards make it too easy to buy expensive items, to the point where you may not be able to pay the bill when it is due.
• Carrying a credit card makes it tempting to buy on impulse. Always remember, you’re actually spending real money (maybe even money you don’t have).
• If you only pay the minimum balance each month, you’ll never pay off the balance, and the interest that accrues will become much more than the original amount financed.
• If you fail to pay your credit card bills or fall behind on them, it will damage your credit rating and make it harder for you to get credit in the future.

Credit Cards Have an Effect on Your Credit History

Credit cards are the number one reason people overspend and buy stuff they don’t need. More importantly, if you continue to charge while carrying an outstanding balance, your debt can snowball and before you know it your minimum payment is only covering the interest. If you start having trouble repaying the debt, you could tarnish your credit report. Credit bureaus keep track of your history and assign you a rating called a FICO Score. If you have a poor credit rating because of a bad credit history, this can keep you from getting things you want, like an , an , or even a ! Take time to read through the terms and conditions that come with a credit card account, and become familiar with what’s expected of you.

Types of Credit Accounts

Let’s look at the three types of accounts that credit companies generally issue (not just credit cards):

• Revolving agreement – A consumer pays in full each month or chooses to make a partial payment based on the outstanding balance. , gas and oil companies and banks typically issue credit cards based on a revolving credit plan.
• Charge agreement – A consumer promises to pay the full balance each month, so the borrower does not have to pay interest charges. Cards such as American Express, and charge accounts with local businesses often require repayment on this basis.
• Installment agreement – A consumer signs a contract to repay a fixed amount of credit in equal payments over a specified period of time. , , and personal loans often are financed this way.

It’s Important to Understand and Decode the Fees and Terms

Annual Fee: This is basically a membership fee for having your credit card account. It will range from no annual fee to upwards of $50.

Transaction Fees: Any charge other than a purchase usually carries an extra fee, such as a cash advance, late payment, or going over your credit limit. Some credit cards even charge a monthly fee.

Annual Percentage Rate (APR): The interest rate, expressed per year, applied to your purchases.

Finance Charge: The total amount that you pay to use your credit, which includes interest and any other charges related to the transaction. The credit card company will use one of three methods for calculating the finance charge:

• Adjusted Balance Method (preferred): This method results in the lowest finance charges. The balance is calculated by subtracting the payments and any credits from the balance you owe at the end of the previous billing period.
• Average Daily Balance Method (most commonly used): You’re credited for a payment from the day the credit company receives it, and then they figure the interest based on the average amount you owed during the previous month.
• Previous Balance Method (most expensive): The finance charge is calculated on the balance owed at the end of the previous billing cycle. Payments, credits and new purchases made in the current billing cycle are not included.

When Choosing A Credit Card You Should:

• Look for a low interest rate, but remember that the interest rate is not fixed; it may change in the future.
• Look at how they calculate finance charges.
• Look at all charges and costs. Some companies will add other fees, such as late payment fees if your payment arrives after the due date, or transaction fees every time you use the card.
• Look at grace periods, and try to choose a card that starts the grace period on the day the purchase is posted to your account, not on the actual day of purchase.
• Keep an eye out for extra services and features available. Many cards offer extended warranties, insurance, and rebates. These are great as long as you will use them and won’t cost you extra.

Before you submit a credit application, get a copy of your credit report to make sure it's accurate. The three major national credit bureaus are:

• EQUIFAX – (800) 685-1111; www.equifax.com
• EXPERIAN – (888) EXPERIAN (397-3742); www.experian.com
• TRANS UNION – (800) 916-8800; www.transunion.com

Credit cards are a great way to enhance your daily life. When used responsibly, credit cards help us to buy things we need on a budget and time line we can afford. If you want to understand how credit and credit cards will affect your specific financial or credit needs, talk with a financial adviser before applying. This extra step will ensure you are making the best decisions for you. For more information about credit cards and how they are processed, Shift4 Corporation has an informative website with detailed information about payment processing.